The airline industry

A surprising boom

Governments should unleash the potential of an amazing recovery in airlines

PROFIT and airline are words rarely seen in the same sentence. By the end of this year the world's airlines will have lost a cumulative $43 billion since 2001. After terrorism, war, SARS and the post-dotcom slowdown came a fifth blow in the form of jet-fuel prices. The doubling in the cost of oil in the past two years has more than doubled the industry's fuel bill, partly because of pressure on refinery capacity. Much of America's airline industry is in bankruptcy protection.

It might seem more than a little perverse, then, to argue that aviation is booming when most headlines suggest the opposite. The evidence, however, is overwhelming. Strip out higher fuel costs and the industry as a whole would have more than recouped this year all of the losses it has made since 2001. Although American carriers are still deep in the red, in the rest of the world airlines are holding their own. Many big carriers in Europe and Asia are doing amazingly well (see article). Traffic just about everywhere is growing strongly. India and China are exploding on to the scene, and the Middle East is emerging as a global hub between Europe, Asia and Australia.

The low-cost-airline phenomenon is spreading fast from west to east Europe and further afield, to India and elsewhere in Asia. As millions who have never flown before start taking to the air in these places, just the annual increase in air traffic will, in about a decade, be as great as the total number of flyers in 1969, the year Boeing introduced the jumbo jet. Moreover, the airlines carrying these new millions will use the profitable business model of low-cost carriers.

The industry has been doing much to re-shape itself. Mainstream carriers are altering their networks to cope with, or retreat from, short-haul competition. Worldwide labour productivity has risen by one-third, as management has wielded the knife. After several years of messing about, American carriers in court protection from their creditors under Chapter 11 of the bankruptcy law are at last tackling their demons. Their distinctive problem is disproportionately high labour costs accounting for nearly 40% of total operating expenses, compared with 20% in Asia and around 30% in Europe.

Even if oil prices were to ease back down to around $30 (some $15 below what many in the airline industry expect), operating profits would represent a mere 10% of revenues, pretty low for such a capital-intensive business, reflecting the fierceness of competition. Still, that would be twice the margins earned in the boom years of the mid-1990s—a measure of carriers' progress.

The challenge for the industry is to make sure that a genuine turnaround does not, in a world of high oil prices, result in more profitless prosperity. Some of the airlines' fate rests in their own hands—carriers can hedge against rising fuel costs, for example. But the industry's recovery brings with it a reminder that government bureaucracy remains the biggest obstacle to its future progress. Internal liberalisation in America and Europe has been a boon and is spreading rapidly, promoting the rash of new low-cost contenders in Asia. By contrast, inter-regional long-haul flights tend to be tied down in bilateral deals that limit the freedom to fly where the market would take airlines. Nor do most countries allow foreigners to own more than 49% of an airline's shares.

Talk of freedom

Next week the European Union and America will sit down to try to hammer out a liberal air services agreement, with the intent of opening the skies across the Atlantic. Most EU countries, when they previously negotiated on their own behalf, signed semi-liberal open-skies deals, abolishing all restrictions on flights, but keeping rules limiting foreign ownership. At a minimum, there should be no retreat from these.

But governments should at last go further. They should scrap ownership rules and retreat from anything but technical and safety matters. Last week America made a token gesture saying that foreign executives could run domestic carriers even though ownership rules would stay. If that is all that is on offer, Britain (which clings to an ancient and illiberal national air agreement with America) will be tempted to block any EU-wide transatlantic liberalisation that would allow more American carriers to use London's Heathrow airport.

The justification would be that the coveted unlimited access to Heathrow should be held as a card to win the greater prize of total liberalisation. But that would be to counsel perfection. The approach on both sides should be to keep up the momentum for liberalisation. If both sides agreed to open the market across the Atlantic, the whole regulated structure of aviation would crumble and the industry that gave birth to globalisation could itself finally join the movement. The ride would be bumpy, but hugely worth it.